subject: Choosing To Invest In Large Or Small Cap Stocks [print this page] There are basically three different types of stocks. These are large cap, small cap and mid-cap stocks. Within these stocks there are also value and growth stocks. Choosing to invest in large or small cap stocks is the decision you will need to make with your investing strategy.
The definition of these stock types can be explained by first explaining what market capitalization is. Market capitalization is calculated by multiplying the amount of outstanding shares by the current stock price. Large cap stocks are generally those stocks with a market capitalization greater than 5 billion, mid-cap stocks are between 1 to 5 billion and small cap stocks are less than 1 billion dollars. Another classification known as microcap stocks are valued at less than 250 million.
The market capitalization is an important factor in determining how to make money in the stock market. The large cap stocks are those companies which have been around for a long time. They have weathered some of the worst economic events and come through it. They will generally be expected to continue forward. However, sometimes these companies are not able to adapt to changing conditions and end up folding. So even if you choose to invest in large cap stocks, you still need to watch the fundamental items in the companies. These include earnings, price/earnings ratio, management style, industry, cash flow, free cash flow and many other items.
Small cap stocks are usually a more risky investment style. They are the smaller companies which may not have the ability to weather a strong economic storm. However, since they are smaller, they are more likely to be innovative and creative. They can make important decisions faster than the large cap companies. They also may not have the bureaucracy of the large companies. They could also be on a faster growth track than the large cap companies.
Value stocks are those stocks which represents the companies which will generally pay dividends and have a slow, steady growth pattern. If you invest in this type of investment, then you are willing to watch your money grow slowly. You will probably end up beating inflation, but will not usually achieve the jack rabbit investment style.
Growth stocks are those companies which are striving to grow their company. They will take more risks, and are more creative in their management style. They will usually not pay dividends. They will rather choose to re-invest their money in the company in the form of research and development or infrastructure. These companies are more like the jack rabbit style of investing.
Over the years, large cap and small cap stocks have traded places in how fast they grew. This largely depended on how the investors perceived the stock market and what their expectations were. Overall, large cap stocks have achieved a 11.1 percent return to small cap stocks 10.4 percent return. This was measured from the period of 1926 to 1983.
I would expect that the wise investor would choose to have a mix of all types of stocks. This strategy becomes a part of spreading your investments across many different asset classes and in known as asset allocation.
